Time ARM Bomb - Silicon Valley Style

Time ARM Bomb - Silicon Valley Style
Calculated Risk picked up on this article.

What I don't understand about Mr. Amacker's story is why he would add 2 bedrooms and 1 bathroom to his home when he was only living with his two sons. I wonder if the loan exceeded the cost of the addition? Inquiring minds want to know. (house details at bottom)

2009-09-20: $30 billion home loan time bomb set for 2010
Thousands of Bay Area homes have a ticking time bomb embedded in their mortgage. The homes were purchased with loans known as option ARMs, short for adjustable rate mortgages.
...
Joey Amacker of Newark, who works as an account manager for a catering company, refinanced his home with an option ARM for $624,000 so he could pull out money to build an addition. The friend who sold him the loan assured him that an option ARM was a safe and affordable product, he said.

Amacker said he initially made only the minimum monthly payment of $1,800, which covered part of his interest and none of the principal. The amount he owed grew to $660,000 by November 2008, according to loan documents.

Meanwhile, payments that would cover both interest and principal also escalated above his reach, said Amacker, a single father of twin teenage boys. Although he wanted to pay more than the minimum, "it was a struggle, borrowing from Peter to pay Paul," he said. His 21-year-old daughter moved in to help out, and he rented out the addition he'd built. But he couldn't keep up with the payments. He's been trying to get his bank to modify the loan, but says it doesn't get back to him. The bank did not respond to a request for comment.

Between the negative amortization and his missed payment and penalties, Amacker's total debt has ballooned to $725,000, while the house is probably worth about $500,000, he said.

"I feel so ashamed of how I could have gotten myself in such a bad situation," he said.

Like Amacker, most option ARM borrowers owe much more than their homes are worth, so they cannot refinance their way out of trouble.

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6589 Fountaine Ave, Newark, CA
5 beds, 3.0 baths, 2,070 sq ft
Zestimate®: $548,500

Sale History
02/16/2001: $425,000

What in the hell did he create? (click image to enlarge)

Interest-Only Insanity Part II

Moller Interest-Only Insanity

Right on queue, the interest only idiots are coming forward and admitting the world how foolish they were. Didn't they learn from the subprime crew? You don't have your foolish antics published in the mainstream press. You just don't do it!

San Diego, you have a world of hurt coming your way.

2009-09-09: As an Exotic Mortgage Resets, Payments Skyrocket
Edward and Maria Moller are worried about losing their house — not now, but in 2013.

Like millions of buyers during the boom, the Mollers leveraged their way into a house they could not otherwise afford by taking out a loan that required them to make only interest payments at first, putting off payments on the principal for several years.

It was a “buy now, pay later” strategy on a grand scale, meant for a market where home prices went only up, and now the bill is starting to come due.

“I’m praying for another boom,” said Mr. Moller, 34. “Otherwise, we’ll have to walk.”

The Mollers bought in 2005, paying $460,000 for their three-bedroom, thousand-square-foot house. A quick refinance a few months later supplied cash to pay debts. Now the house is worth perhaps $310,000. After their interest-only period is up, they expect their monthly payments to increase 20 percent if not more.
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Where do you think this house will be at bottom?

My estimate... $200K, barring total economic chaos.

8429 Dallas St, La Mesa, CA
3 beds, 1.5 baths, 1,054 sq ft
Zestimate®: $334,000

Sale History
04/29/2005: $460,000
04/11/2001: $203,000

Interest-Only Insanity

Interest-Only Insanity
Courtesy New York Times and Calculated Risk.

2009-09-08: The House Trap
“I understand I took a risk,” said [Dean Janis, a Southern California lawyer who bought a $950,000 home in 2004] “But I did not anticipate that the real estate market would go down 30 percent.” He talked with Wells Fargo about his options, and the lender said he had none.

Ok, let's check out this McMansion...

4371 Piedmont Dr San Diego CA 92107
2 beds, 1.0 baths, 1,073 sq ft
Zestimate®: $782,500

Sale History
06/14/2004: $956,500
12/27/2001: $515,000

2bed/1bath and he PAID $950K!!!
What is wrong with people?!!!

This place should go right back down to $400K at the bottom. Until then, just rent and save yourself a sh*tload of money, assuming our money retains any value by then (see A Gift from Jim Sinclair). However, it is about 1.7 miles from Point Loma Seafood, but it's getting way too crowded and expensive--that damn fish sandwich is now $8.32. I can remeber paying around $3.50 for one. More inflation we can attribute to foolish house buyers, perhaps?

Juergen and Lois Kempff

Juergen and Lois Kempff, Home ATM

It seems as though the OC Register and Calculated Risk are getting into the business of hall of shamers, and this family wrote the book on shameful housing acts. Perhaps you can take comfort in knowing that your tax dollars are going towards a college education for the Kempff kids. Without our help, how could they overcome the College Bubble?

Even in the face of hardships, a house is NOT an ATM.

25231 Del Rio, Laguna Niguel, CA 92677-1517
04/09/2002: $433,000

Current amount owed: $786,000!!

2009-09-07: One Family: Option ARM, failed Modification, Health Issues, Bankruptcy, and more

2009-09-06: Family faces loss of home amid health crisis
LAGUNA NIGUEL – When Juergen and Lois Kempff received a notice of default in the mail saying their home was now in the foreclosure process due to missed payments, they figured it was junk mail.

The notice came from a company they didn't recognize, and to be honest, they had some heavier thoughts on their minds.

...the Kempffs' option adjustable-rate mortgage payment skyrocketed to $4,300 a month from $2,500 last December. Seeing no way to afford the new payments, the Kempffs opted for a loan modification from their bank, IndyMac which was later purchased by OneWest from the FDIC in March.
...
The unpaid amount on the Kempffs' loan is $786,802.59, short of qualifying for a modification by about $60,000.

Since the Kempffs purchased their home in 2002, they took out loans and refinanced their mortgage. The equity from those transactions enabled the Kempff family to fix their cracked pool, remedy a slipping backyard slope by putting in three retaining walls, help three children pay for college and pay for the medical bills of their youngest son who had malignant melanoma.

College Bubble?

I briefly mentioned a college bubble in the Welcome to 2009 post, and on another occasion, College/University Bubble, linking to a video on the subject that was removed by YouTube. Mainstream media (and Denninger) has decided to weigh in. Welcome to debt hell, students.

2009-09-03: Denninger - Is The Light Flickering On?

2009-09-03: Students Borrow More Than Ever for College
Students are borrowing dramatically more to pay for college, accelerating a trend that has wide-ranging implications for a generation of young people.

New numbers from the U.S. Education Department show that federal student-loan disbursements—the total amount borrowed by students and received by schools—in the 2008-09 academic year grew about 25% over the previous year, to $75.1 billion. The amount of money students borrow has long been on the rise. But last year far surpassed past increases, which ranged from as low as 1.7% in the 1998-99 school year to almost 17% in 1994-95, according to figures used in President Barack Obama's proposed 2010 budget.
...
The new numbers highlight how debt has become commonplace in paying for higher education. Today, two-thirds of college students borrow to pay for college, and their average debt load is $23,186 by the time they graduate, according to an analysis of the government's National Postsecondary Student Aid Study, conducted by financial-aid expert Mark Kantrowitz. Only a dozen years earlier, according to the study, 58% of students borrowed to pay for college, and the average amount borrowed was $13,172.